In This Article:
Today we are going to look at Briscoe Group Limited (NZSE:BGP) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Briscoe Group:
0.18 = NZ$86m ÷ (NZ$565m - NZ$91m) (Based on the trailing twelve months to July 2019.)
Therefore, Briscoe Group has an ROCE of 18%.
Check out our latest analysis for Briscoe Group
Is Briscoe Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Briscoe Group's ROCE is around the 17% average reported by the Specialty Retail industry. Separate from Briscoe Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Briscoe Group's current ROCE of 18% is lower than its ROCE in the past, which was 41%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Briscoe Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Briscoe Group.
What Are Current Liabilities, And How Do They Affect Briscoe Group's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.